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INTRODUCTION
Kewaunee Scientific Corporation is a recognized leader in the design, manufacture and installation of laboratory, healthcare and technical furniture products. The Company's corporate headquarters are located inStatesville, North Carolina . Sales offices are located inthe United States ,India ,Saudi Arabia , andSingapore . Three manufacturing facilities are located inStatesville serving the domestic and international markets, and one manufacturing facility is located inBangalore, India serving the local, Asian, and African markets.Kewaunee Scientific Corporation's website is located at www.kewaunee.com. Our products are sold primarily through purchase orders and contracts submitted by customers through our dealers, our subsidiaries inSingapore andIndia , and a national distributor. Products are sold principally to pharmaceutical, biotechnology, industrial, chemical and commercial research laboratories, educational institutions, healthcare institutions, governmental entities, manufacturing facilities and users of networking furniture. We consider the markets in which we compete to be highly competitive, with a significant amount of the market requiring competitive public bidding. It is common in the laboratory and healthcare furniture industries for customer orders to require delivery at extended future dates, as products are frequently to be installed in buildings yet to be constructed. Changes or delays in building construction may cause delays in delivery of the orders and our recognition of the sale. Since prices are normally quoted on a firm basis in the industry, we bear the burden of possible increases in labor and material costs between quotation of an order and delivery of the product. The impact of such possible increases is considered when determining the sales price. The principal raw materials and products manufactured by others used in our products are cold-rolledcarbon and stainless steel, hardwood lumbers and plywood, paint, chemicals, resins, hardware, plumbing and electrical fittings. Such materials and products are purchased from multiple suppliers and are typically readily available. CRITICAL ACCOUNTING POLICIES In the ordinary course of business, we have made estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our consolidated financial statements in conformity with generally accepted accounting principles inthe United States of America . Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations, and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
The Company recognizes revenue when control of a good or service promised in a contract (i.e. performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The majority of the Company's revenues are recognized over time as the customer receives control as the Company performs work under a contract. However, a portion of the Company's revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.
Allowance for Doubtful Accounts
Evaluation of the allowance for doubtful accounts involves management judgments and estimates. We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where management is aware of a customer's inability to meet its financial obligations to us, or a project dispute makes it unlikely that the outstanding amount owed by a customer will be collected, a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, a reserve for bad debts is estimated and recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding.
Pension Benefits
We sponsor pension plans covering all employees who met eligibility requirements as ofApril 30, 2005 . These pension plans were amended as ofApril 30, 2005 , no further benefits have been, or will be, earned under the plans subsequent to the amendment date, and no additional participants have been, or will be, added to the plans. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the pension plans. These factors include actuarial assumptions about the discount rate used to calculate and determine benefit obligations and the expected return on plan assets within certain guidelines. The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may significantly affect the amount of pension income or expense recorded by us in future periods. 10
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Self-Insurance Reserves
The Company's domestic operations are self-insured for employee health care costs. The Company has purchased specific stop-loss insurance policies to limit claims above a certain amount. Estimated medical costs were accrued for claims incurred but not reported using assumptions based upon historical loss experiences. The Company's exposure reflected in the self-insurance reserves varies depending upon market conditions in the insurance industry, availability of cost-effective insurance coverage, and actual claims versus estimated future claims. Income Taxes We are subject to income taxes in theU.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions, such as the COVID-19 pandemic. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, and interpretations related to tax laws and accounting rules in various jurisdictions.
RESULTS OF OPERATIONS
Sales for fiscal year 2022 were$168.9 million , an increase from fiscal year 2021 sales of$147.5 million . Domestic sales for fiscal year 2022 were$126.9 million , an increase of 14.2% compared to fiscal year 2021 sales of$111.0 million . The increase in Domestic sales resulted from both higher volumes and the implementation of price increases in response to higher raw material input costs. International sales for fiscal year 2022 were$42.0 million , an increase of 15.3% from fiscal year 2021 sales of$36.5 million . The increase in International sales in fiscal year 2022 is a result of strong demand across the international markets, primarily inIndia , coupled with COVID-19 related restrictions on construction site access and government mandated shut-downs inIndia that significantly impacted the prior year sales. Our order backlog was$173.9 million atApril 30, 2022 , as compared to$114.5 million atApril 30, 2021 . This is the highest order backlog in the Company's history. The increase in backlog is primarily attributable to strength in the life science and higher education end-use markets withinthe United States . Internationally, customers continue to invest in large infrastructure projects requiring laboratories inIndia , theMiddle East , andAfrica and we were awarded multiple multi-year projects during the year. Gross profit represented 14.3% and 16.3% of sales in fiscal years 2022 and 2021, respectively. The decrease in gross profit margin percentage for fiscal year 2022 is a result of supplier constraints resulting from COVID-19, as well as other supply chain disruptions, that led to increases in steel, wood, and epoxy resin raw material costs, when compared to the prior year, of$4,559,000 in excess of surcharges implemented and recorded as sales. The gross profit margin decrease was also impacted by the cyber attack that occurred during the third quarter, which resulted in$1,131,000 of margin loss due to disruption of production, loss of sales, and absorption of fixed overhead costs which were not covered by the Company's cyber insurance policy. Operating expenses were$26.8 million and$25.3 million in fiscal years 2022 and 2021, respectively, and 15.9% and 17.2% of sales, respectively. The increase in operating expense in fiscal year 2022 as compared to fiscal year 2021 was primarily for increases related to wages, benefits, incentive and stock-based compensation of$1,098,000 , increases in international operating expenses of$693,000 , and one-time costs in the amount of$325,000 related to both the Company's decision to exit certain markets where the Company had historically sold products directly and professional fees related to financing activities, partially offset by decreases of$545,000 in marketing expenses. Pension income was$355,000 in fiscal year 2022, compared to pension expense of$1,153,000 in fiscal year 2021. The decrease in pension expense was due to the favorable impact from pension accounting because of the recovery of the plan assets at previous fiscal year-ends.
Other income, net was
respectively. The increase in other income in fiscal year 2022 was primarily due
to the interest earned on the Note Receivable related to the Sale-Leaseback
financing transaction that was executed on
Sale-Leaseback Financing Transaction for additional information on this
transaction.
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Interest expense was$632,000 and$389,000 in fiscal years 2022 and 2021, respectively. The change in interest expense for fiscal year 2022 was primarily due to changes in the levels of bank borrowings and the Sale-Leaseback financing transaction. Income tax expense was$3.5 million and$990,000 for fiscal years 2022 and 2021, respectively, or 141.6% and 37.8% of pretax loss, respectively. The effective rate change for fiscal year 2022 is primarily due to an increase in the valuation allowance primarily attributable to the increase in deferred taxes of$4,170,000 before valuation allowance as a result of the book to tax differences related to the Company's execution of a Sale-Leaseback transaction for owned real property, which was treated as a taxable sale transaction for tax purposes and a financing transaction for financial statement reporting purposes. The effective rate in fiscal year 2021 was also unfavorably impacted due to changes in the valuation allowance and reduced benefit on net operating loss carryback available. Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were$123,000 and$65,000 for fiscal years 2022 and 2021, respectively. The changes in the net earnings attributable to the non-controlling interest for each year were due to changes in the levels of net income of the subsidiaries. Net loss was$6,126,000 , or$2.20 per diluted share, and$3,672,000 , or$1.33 per diluted share, for fiscal years endedApril 30, 2022 andApril 30, 2021 , respectively. The increase in net loss was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have historically been funds generated from operating activities. In addition, onMarch 24, 2022 , we executed a Sale-Leaseback financing transaction with respect to our manufacturing and corporate facilities inStatesville, North Carolina to provide additional liquidity. See Note 5 , Sale-Leaseback Financing Transaction for more information. Additionally, certain machinery and equipment are financed by non-cancelable operating leases. We believe that these sources of funds will be sufficient to support ongoing business requirements, including capital expenditures, through fiscal year 2023. AtApril 30, 2022 , we had advances of$1.6 million and standby letters of credit aggregating$716,000 outstanding under our secured,$4.7 million revolving credit facility. See Note 4 , Long-term Debt and Other Credit Arrangements, of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility. We did not have any off balance sheet arrangements atApril 30, 2022 or 2021.
The following table summarizes the cash payment obligations for our lease and
financing arrangements as of
PAYMENTS DUE BY PERIOD
($ in thousands)
Contractual Cash Obligations Total 1 Year 2-3 Years 4-5 Years After 5 years
Operating Leases $ 8,821 $ 1,849
Financing Lease Obligations
399 148 180 71 - Sale-Leaseback Financing Transaction 45,811 1,893 3,901 4,059 35,958
Total Contractual Cash Obligations
The Company's operating activities used cash of$7,885,000 in fiscal year 2022, primarily for operations, and increases in inventories of$7,279,000 and receivables of$8,464,000 , partially offset by increases in accounts payable and accrued expenses of$11,886,000 and a decrease in income tax receivable of$955,000 . Operating activities provided cash of$912,000 in fiscal year 2021, primarily from operations, and increases in accounts payable and accrued expenses of$4,567,000 and a decrease in income tax receivable of$1,762,000 , partially offset by increases in inventories of$1,188,000 and receivables of$4,874,000 . The Company's financing activities provided cash of$11,031,000 during fiscal year 2022 from proceeds of$15,893,000 from the Sale-Leaseback transaction, including redemption of preferred shares from the buyer, net of debt issuance costs, partially offset by payments of$5,239,000 for short-term borrowings. The Company's financing activities provided cash of$1,982,000 during fiscal year 2021 from proceeds from the net increase in short-term borrowings of$2,109,000 , partially offset by cash dividends of$108,000 paid to minority interest holders and repayment of long-term debt of$19,000 . The majority of theApril 30, 2022 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2023, with the exception of retention amounts on fixed-price contracts which are collected when the entire construction project is completed and all retention funds are paid by the owner. As discussed above, no further benefits have been, or will be, earned under our pension plans afterApril 30, 2005 , and no additional participants have been, or will be, added to the plans. In fiscal year 2022, we made no contributions to the plans. In 12
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fiscal year 2021, we made contributions to the plans of
make no contributions to the plans for fiscal year 2023.
Capital expenditures were$1,908,000 and$2,397,000 in fiscal years 2022 and 2021, respectively. Capital expenditures in fiscal year 2022 were funded primarily from financing activities. Fiscal year 2023 capital expenditures are anticipated to be approximately$3.5 million . The fiscal year 2023 expenditures are expected to be funded primarily by operating activities and proceeds from the sale-leaseback financing transaction. Working capital was$49.3 million atApril 30, 2022 , up from$26.3 million atApril 30, 2021 , and the ratio of current assets to current liabilities was 2.2-to-1.0 atApril 30, 2022 and 1.8-to-1.0 atApril 30, 2021 . The increase in working capital for fiscal year 2022 was driven by a$13.5 million Note Receivable related to the sale-leaseback financing transaction, resulting in a$5.2 million reduction in short-term borrowing and a$5.2 million increase in managed working capital. No dividends were declared or paid on the Company's common stock during the last two fiscal years. The declaration and payment of any future dividends is at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, capital requirements, investment and growth strategies, financial condition, the terms of the Company's indebtedness, which has contained, and may in the future contain, provisions that could limit the payment of dividends in certain circumstances, and other factors that the Board of Directors may deem to be relevant.
RECENT ACCOUNTING STANDARDS
See Note 1 , Summary of Significant Accounting Policies, to our Consolidated
Financial Statements in this Form 10-K for a discussion of new accounting
pronouncements, which is incorporated herein by reference.
OUTLOOK
Financial Outlook
The Company's ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors. Demand for the Company's products is also dependent upon the number of laboratory and healthcare construction projects planned and/or current progress in projects already under construction. As the fiscal year concluded, economic uncertainty remained from continued broad-based inflation, a challenging labor market, and a possible recession. With that being said, the Company believes the outlook is bright based on Kewaunee's record backlog and improved operating performance during the fiscal year. The Company believes the strength in its backlog demonstrates the confidence customers have in Kewaunee's ability to meet their requirements. When combined with changes in its go-to-market strategy and continued investment in its manufacturing operations, the Company feels it is well-positioned for the next fiscal year.
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